The Lease Clause You Must Watch For in Due Diligence

keep-out

I was recently cleaning out some old files and came across a difficult situation I dealt with several years back.  Some of you may have dealt with similar issues in the past, but I’m certain many of you have not.  Evaluating no surface usage provisions in leases is an integral part of the E&P life-cycle.  It is important when you buy the lease from the Lessor, when you acquire a lease, during operations and later in the life of the asset when you have maintenance operations.  While many of us have experience with leases which outright ban any use of the surface of the leased premises, what I’m talking about are the trickier negotiated agreements which allow usage of only specified lands — or usage only during specified time-frames.

There shall be no use of the surface of the leased premises in the west half of Section 2 and Section 11.

It seemed like an innocuous request, he owned all of section 2 & 11 and gave us choice of acreage on which to conduct our operations outside of the western half of the sections.  The west side of the section fronted to a fairly busy highway and he had that land surveyed and platted for a subdivision.  He certainly didn’t want us having the right to run our access roads through the middle of  his intended subdivision, and neither would I in his situation.  He did graciously offer to sell us a ‘row’ of the lots so we could build an access road, but his asking price for the lots was, let’s just say, excessive.  We ended up agreeing on the deal for the lease which gave us the rights to use the surface of the property on the specified 80 acres.

Fast forward two years.  Now I’m working on the surface operations side and we are getting ready to drill this section.  We’ll need a padsite, access roads, and right-of-way for a pipeline.  The pad-site was pretty easy, the lease specified liquidated damages and we were going to place it on the specified surface usage area.  Some of you have probably already figured this out — there was no place to put in a road without building some type of permanent bridge over the ravine that you can see in my crude drawing.  Mind you, I looked at a topography map when we decided on the surface usage areas when buying the lease.  I made quite certain he was offering me areas that would be suitable for a well location.  He knew something that I didn’t — those perfectly flat areas weren’t easily accessible except from the west side of the property (the side we agreed to a no surface provision on).

No Surface Before1

This put us in the untenable position of having two choice:

  1. Build a short bridge which would have to be permanent and able to withstand a heavy load.
  2. Pay the lessors exorbitant price to cross through the western portion of the section.

Of course, both of those options were not on the table at this point, so the only thing to do was to go out there and walk around.  I met with the surveyors later in the week and we walked along all the property lines and followed all the ravines to try and find an area that we could cross (temporarily or otherwise).  After about 3 miles we came across a high point that split the largest ravine for about 20 feet.  After further environmental inspection we found that we could install a permanent access road in that location, and purchased road ROW from the adjoining landowner to get us to a main road.  This allowed us to pay the landowner  where the pad site was located (also the lessee) liquidated damages, and save ourselves from writing a big check.

No Surface After

However, we could have just as easily been up a creek without a paddle.  Finding one (cheap) way to access your well pad is a stroke of luck, and 9 times out of 10 when you get caught by a clause designed like this you will be in trouble.  So make certain when you sign off on these provisions that you investigate the real reasons the landowner might want them.

Randy Young

Randy Young

Randy is a land consultant with experience in field and in-house land work, land administration, and software consulting with systems used in the land management business. He is an active member of the AAPL, HAPL, and NHAPL and is a regular attendee of industry functions.

Randy’s latest projects have included land data systems integrations, with a focus on Quorum Land System.

  • Nick Loesch says:

    Another useful and insightful blog post. Keep up the good work
    Nick

  • Randy,

    Excellent article with several great points. As you make a great case for, lease cannot be read in a vacuum. It’s provisions must be read and understood in full context of the circumstances surrounding the property, the deal, and the proposed operations. If you’re interested, I wrote an article pointing out other dirty negotiation tactics in oil and gas.

    Take care, Austin

    • Randy Young Randy Young says:

      I actually saw that article and really enjoyed it.

      I’m sure it is an old trick, but I never thought of just comparing the first word as a quick check. You should also never trust the MSWord “passworded” track changes function, I have a program that can turn that off in less than a minute — make the changes — and then re-password it. Of course, it is for personal use — when I forget the password…

      I’m in favor of having lease buyer never ‘delete’ language, always strike the clause or include “Intentionally Deleted” type language in place of a paragraph.

  • Scottie Schufford says:

    Randy
    This blog is “Awesome”!

  • >